Most people complete their Chapter 13 bankruptcy case to get rid of debts they cannot pay and create a solid financial foundation for themselves and their families. However, a Chapter 13 dismissal happens occasionally for various reasons. In those situations, it is essential to understand how to negotiate with creditors.
Before you decide to voluntarily dismiss your Chapter 13 bankruptcy, check out our article covering the pros and cons of voluntary Chapter 13 bankruptcy dismissal.
How Do Creditors Find Out About My Chapter 13 Dismissal?
The most common reason for a Chapter 13 dismissal is non-payment by the debtors. For example, a person might lose their job, become injured in an accident, or develop an illness. As a result, they cannot make their Chapter 13 payments, so the Chapter 13 trustee files a motion to dismiss the case. A Chapter 13 may also be dismissed for failing to file documents, attending hearings, meeting deadlines, or filing required tax returns each year.
When the Chapter 13 trustee files a Motion to Dismiss, you receive a copy of the motion. You have a specific number of days to object to the motion and request a hearing. If you do not respond to the motion, the court enters an order of dismissal. If you object, the judge expects you to explain why your case should not be dismissed. Without a valid reason, the judge dismisses the case.
The bankruptcy clerk sends a copy of the Notice of Dismissal and Order Closing Case to all creditors and other interested parties.
You still have options, which is why we built the following free debt relief calculator for you to easily and holistically compare different options.
What Are the Effects of a Chapter 13 Dismissal?
Because you did not complete your Chapter 13 plan, your debts are not discharged. As a result, the remaining amounts you owe to all creditors are now due and payable. The dismissal reverses any changes made to the terms of your debts by the Chapter 13 plan.
For example, suppose your Chapter 13 plan reduced the interest rate on your vehicle or the amount you owed to satisfy the lien on the vehicle. Then, when the court dismisses the Chapter 13 case, the interest rate increases to the original loan rate for the remaining balance on the account. Instead of paying 10% of the balances owed to unsecured creditors to discharge those debts, you now owe the entire balance due on the account.
The automatic stay that protected you from creditor actions ends. Your creditors can take all legal actions to collect unpaid debts, including filing debt collection lawsuits. They can repossess a vehicle, foreclose on a mortgage, and seek wage garnishments for past due debts.
What Happens to Lawsuits Filed Before I Filed Bankruptcy?
The automatic stay prevents creditors from pursuing debts after a person files for bankruptcy relief. Therefore, lawsuits are generally dismissed after a bankruptcy case is filed. However, a lawsuit might still be active if you have only been in Chapter 13 for a few months. If so, the creditor can continue with the lawsuit.
If a lawsuit was dismissed because you filed for bankruptcy, the creditor could file a new lawsuit after your Chapter 13 dismissal. The creditor can pursue a personal judgment and then request a wage garnishment.
How Do I Negotiate with Creditors to Settle Debts After My Chapter 13 Dismissal?
The weeks after a bankruptcy dismissal can be overwhelming. You might receive numerous letters and phone calls from creditors demanding payment. First, you might try to negotiate with creditors to settle the debts.
Debt settlement is the process of negotiating with creditors to reorganize the debt. You negotiate with each creditor an agreement and payment schedule. The agreement could include reducing the debt, lowering the interest rate, increasing the term for repayment, paying a lump sum payment, or any combination of these options.
Before negotiating with creditors after a Chapter 13 dismissal, you must determine how much you can afford to pay creditors based on your current income and expenses. You can only pay the amount of your disposable income toward debt. Therefore, create a realistic budget to determine disposable income.
Then, make a list of all debts. Separate the list by unsecured and secured debts. The secured debts include your mortgage and car loan, which you must pay to keep your home and vehicle. Those creditors might work with you to restructure the loan so you can afford to keep these items. However, be realistic. If you cannot afford to pay secured debts, consider finding a less expensive place to live or trading your vehicle for a less expensive car.
Unsecured debts include credit cards, medical bills, personal loans, old utility bills, tax debts, and domestic support obligations. You must deal with unpaid tax debts, alimony, and child support. Those debts can result in severe legal penalties if you do not resolve those debts. General unsecured creditors are the last priority. However, you do need to try to negotiate with those creditors because they can file debt collection lawsuits and seek wage garnishment orders if you do not resolve the debt.
Are There Other Options for Settling Debts Other Than Debt Settlement?
Another option other than debt settlement might be better for your situation. For example, debt management can help you pay debts quickly by renegotiating interest rates with creditors.
In some cases, debt consolidation loans can resolve a debt problem. However, you should talk with debt relief counselor before borrowing against your home or other assets to pay unsecured debts. In addition, using the equity in your assets might not be the best choice for resolving debt problems.
A person might be able to file bankruptcy again. You might meet the income requirements for Chapter 7, especially if the reason for your Chapter 13 dismissal was a decrease in income. A Chapter 7 case does not require you to make monthly payments. Instead, you discharge your general unsecured debts without paying any money to those creditors. Try our free Chapter 7 calculator.
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